Sunday, March 20, 2016

I Miss My Tax Refund

This past Sunday, I finally did our taxes. I normally look forward to this the way young children pine for Christmas, or Ben Wyatt's almost-accounting colleagues look forward to playing Ledgerman in Cones of Dunshire. I assumed the fact that I liked taxes was just my inner-nerd making itself known, or maybe more evidence that I should have majored in Accounting instead of English. But this year I found myself kind of hating the task. Because this spring, for the first time ever, I owe Uncle Sam money instead of getting a refund.

It's some pretty serious coin, too. We're writing checks to various governments for over two grand and, friends, having the government give me an interest-free loan is not as fun as it sounds. Writing those checks sucks, especially since it means we have less to invest and spend than we normally would.

I'd like to say that, since this is supposedly a personal finance blog, I've found some way to rise above the emotional aspect of money. But, if anything, writing and budgeting about money has probably had the opposite effect: we think about it more, and I find our emotions are tied up in it more as we cultivate the financial aspects of our lives.

Despite the excellent military protection and medical benefits that our taxes provide, I really felt some anger and resentment while I was writing those checks. This is normally the time of year that I get to feel happy about getting a big old check from the government. It's like Christmas, and my rich uncle, instead of sending me a sweater or a book, gives me what I really want: a big pile of money that I can blow on anything I want.

(Normally, what I want is a scooter. It makes no sense since we already have two, and both work fine. But go ahead and ask Mrs. Done by Forty. Every April she has to convince me not to use our refund on some two wheeled contraption, like this one. Only $1,250 for a vintage cafe racer, and it is so friggin cool.)

Anyway, instead of that conversation, we're having other ones, like how we can't go out to more fancy brunches this month, because the federal government needs more of our money, apparently.

Shouldn't I feel good about this scenario? We had more of our money available to us throughout 2015 to invest or spend, while the government lent us a couple grand without charging interest or penalties. And since we invested more of the family rubles in 2015 than we spent, I suppose we probably came ahead in that scenario. It was a good thing for the government to give us that loan, and to pay it all the following year without penalties or interest.

But it's kind of a specious argument, as Jason Hull notes. The kind of interest you'd make on your tax refund if you saved it throughout the year is laughably insignificant: $12.17, on average (assuming you got the average refund of $3,000, spaced out through the year, and if you put it in to a savings account, and you paid taxes on the interest gained). So yeah, twelve bucks is not a lot of money. The good folks at FiveThirtyEight have a handy calculator that shows what you might earn if you invested it in stocks instead (roughly $239) or paid off credit cards ($331).

No matter what you choose to put your tax refund in though, you're not going to get rich investing it throughout the year as opposed to the following spring.

The rub, of course, is that you might not do something smart with that extra $250 in your paycheck each month. You very well might spend it instead.

Of course, I want to go spend my refund, too. (Seriously, check out this Honda. It has a friggin skateboard for a seat and is only $1,800. Money please!) Still, Hull argues that I'm more likely to convince myself once a year to do the right thing, and save my big tax refund, rather than convince myself 12 or 26 times a year to put those "tax savings" to a good use.

That makes intuitive sense, and I think it's especially good advice for your average American household: give the government an interest free loan, count on yourself to make one good decision instead of twenty six good decisions, and come out ahead.

But my guess is that most of the people reading this blog are atypical, in that you likely have way, way better financial skills than your neighbors. Heck, we have evidence that you're doing better than the average American family, so maybe Hull's advice is not for you. For the average Done by Forty reader, are you better off underpaying your taxes a bit throughout the year, and netting a few hundred extra dollars by putting that money in the market?

On the other hand, maybe the juice is not worth the squeeze, when you consider how unhappy you might feel writing a check instead of getting a check when you do your taxes?

Most importantly, should Mrs. Done by Forty listen to reason, and agree to buy a motorcycle?

As we tend to do, let's let a survey decide, and let me hear it in the comments.

That's a great goal, Captain Dividend, though avoiding taxes is a great goal in and of itself. I'll show my ignorance here, but aren't dividends taxed at 15% (or 20% if you're a real baller)?

I suppose if the buys are happening in IRAs or other tax shelters, then it's a moot point. Will have to check out your blog a bit to see how you're approaching this, but I've got great respect for people building income streams via dividends. It's like the rental real estate approach of paper investments: cash flow, baby.

Well, I've gotta say that once I hit the ranks of the self-employed taxes became a whole new ugly ball of wax. It's not just the pain on tax day, it's the pain of those quarterly payments. And if you are fortunate enough to have a big jump in income one year - look out! There was one year when I had to write a 5 digit check to the IRS. OY! And in this world that I live in, refunds sorta become irrelevant - because even if you've overpaid, you still have to make a quarterly payment on April 15 for the next year, so the best you can generally hope for is to owe less on tax day. Sorta takes the varnish off of the whole deal and makes the illusion of free money disappear completely. Sigh.

True, the quarterly payments must take the shine off the apple. Having to take out your effective tax rate from every dollar must take a lot of discipline, and take all the fun out of tax refunds, or take them out of the equation entirely.

I used to be like you. Many years of getting large refunds and liking it. Then writing checks and being irritated. But now I don't mind writing big checks to Uncle Sam. The main reason being that tax fraud is now so prevalent, and the system is so bad at protecting us from it, that one thing we can do at least is to not be waiting on the gov for a refund. In a fraud situation, you may not see those funds for a long time and you'll have to fight to prove that you didn't really already receive it. If you owe the gov however, then you're the one in the power position when it comes to trying to straighten things out.

Neither. I'm referring to the massive amount of identity theft tax fraud that's been occurring these last several years, where fraudsters file as you, claim a big refund, and disappear. It's a HIGE issue these days as the internet has made it much easier and the IRS doesn't have enough resources to tackle it effectively.

As usual, DB40, your posts bring a smile to my face - thank you for that. :-) We too had to pay in this year, for the first time. And I have to say I didn't like it. I know logic says don't get a refund, but my childlike attitude towards big lumps of money (even if they were mine in the first place) says, "Bring on the cash!" Next year we're shooting for a refund. :-)

So true. I always pride myself on being logical and math based. Those who make financial decisions based purely on emotions drove me a little nuts. But last year I owed the IRS and I hated it too. Even though I knew that my paycheck was higher throughout the year, the feeling of getting a refund is wonderful whereas having to pay is pretty awful! I'm trying to aim at not owing but not getting too fat of a refund either.

By some miracle, we ended up within $75 of our tax bill for 2015. Our taxes are pretty unpredictable from year to year (rental properties, non-cash compensation, energy and other credits are all great, but complicate the tax planning), so I'm usually pretty happy if we end up withholding somewhere between +/- $2000 of the total we owe to Uncle Sam. That said, I do tend to prefer it when it's a refund we're getting back instead of writing a check. The check is just never fun to write.

We have a few unpredictable items, too, which threw off my calculations this year. I thought we could kind of calculate things in Q4 and adjust to get us close to owing nothing, but somewhere my math went awry. :/

As I await our CPA to finish things off, our income/expenses should give us a similar refund as last year. The math clearly favors breaking even/owing the government, but psychologically getting a refund feels more like a bonus. I don't know if that will ever change as a W-2 employee.

The CPA a friend I grew up with absolutely provides great value, especially with the real estate investment portion. We initially went to him because of a large amount due to the IRS a few years ago and saved us a good amount of money. There is some tax avoidance and advice, also being able to shoot him a question when it comes up is certainly nice. The work itself is not a huge issue as we gather the documents and afterwards go through it line by line as well.

The best way I think to get around this problem is set up a small interest bearing account and automatically put a percentage of your income in it every month (depending on your expected income for the year, your regional tax rate, and how much you're already paying at source). This way you never really see the money, but you aren't overpaying your taxes and missing out on the interest either. Come tax time, if you owe, you'll know you already have the money.. so the hit will be softer to take psychologically. If you don't owe, then you get to spend the money in the "tax savings account" as you see fit.

That's an interesting approach, GoGoAssets. While we wouldn't earn much interest, and there are probably some additional opportunity costs to consider, it might ease the pain of writing the check. If no check's needed, hey, found money.

Since I pay five figures in quarterly taxes every three months, I go out of my way to get a refund. It would be really dehumanizing to pay so much quarterly only to turn around and owe more. I don't mind getting a smallish refund. Like you said, the interest we might be earning on that is very insignificant.

You don't always get your loan interest free - we've had to pay penalties and interest one year - on about $2500. It depends on your previous year's taxes, and a few other things. But this year is the first year we've gotten a refund in about the last 7 years. It was all because of moving, so we'll probably owe again next year. We actually got a refund from PA this year thanks to 529 and HSA contributions - except the state's online system doesn't see that they owe us :(

This. I've never withheld as much as I should because I love that happy feeling. And because I don't want to do the math to figure out how much to withhold... Especially complicated with a variable income. Great point by Jason. We'd probably mess up and miss out on the thirteen bucks anyways. Plus, now with 1099 income being our primary, we could potentially face penalties if we underpay, so I'd rather get the refund for overpaying.Plus, it makes me happy.

My goal is to try and get between a $500-1,000 refund but that rarely works out. For one my income is extremely variable on a monthly basis so making any sort of prediction and to change my withholding would require monthly updating. And it seems like each year for the last 3 tax years we've had major changes to our tax situation. Married in 2012. Bought a house in 2013. Lots of unplanned/unexpected medical expenses starting at the end of 2014 and through a lot of 2015. Lost a bunch of income with my wife resigning from her job in 2015. So making any sort of planning has been a waste of time especially adding all of these changes on top of the fact that my own income is so variable.

I understand the reasoning of just making 1 good decision and while that's probably good for many people it's also a bit of a blessing in disguise because you're likely to think you're in a better situation due to your "good decision" even though you haven't fixed the underlying behavior that can lead you to really build wealth.

Love the Parks & Rec reference! I'm team no refund. This was my second year of owing Uncle Sam (this year was REALLY steep because I didn't file estimated taxes on my freelance income), but I still prefer doing it that way. For a lot of folks that don't like giving the 0% interest loan, I think it's more the principle of the matter than the ROI of putting the money in stocks (putting it in a savings account does sort of defeat the purpose).

I also miss my nice fat tax refund. As we have made more and more, it is getting smaller and smaller. This year with all of the side income I made and dividends, we actually ended up having to pay several thousand dollars :-(

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.